Essentials for Investment Bankers

By Paul Alessandrini

This book is about investment banking strategy.

This book will provide background information in credit and financial analysis in order for the reader to better understand the disciplines described therein. In addition, there are many practical examples and formatted tables provided to simplify each concept.

Many books have been written for investor bankers by knowledgeable professors offering instructions on each discipline listed above, but there is no book like this that encapsulates and integrates these aspects of investment banking from venture capitalists and investment bankers themselves.

• Language: English
• Publisher: Page Publishing, Inc.
• Release date: Feb 3, 2022
• ISBN: 9781640829657

Book preview

cover.jpg

Essentials for Investment Bankers

Paul P. Alessandrini

Copyright © 2018 Paul P. Alessandrini

All rights reserved

First Edition

Page Publishing, Inc

New York, NY

First originally published by Page Publishing, Inc 2018

ISBN 0 (Paperback)

ISBN 978-1-64082-966-4 (Hardcover)

ISBN 978-1-64082-965-7 (Digital)

Printed in the United States of America

Table of Contents

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Preface

This book is dedicated to students interested in entering the finance industry, entry-level investment bankers, practiced investors, and entrepreneurs.

In the coming pages you will be introduced to a comprehensive, easy-to-understand book on the world of investment banking strategy backed by academic studies and fifty years of personal experience. Various information contained in this text are based on the premise of collaborative lectures and courses attended by the author at the New School for Social Research, at the Wharton School of Finance at the University of Pennsylvania, and at the Baruch College of the City University of New York through its Zicklin School of Business. Step-by-step you will learn the essentials of private placements, initial public offerings, leverage buyouts, mergers and acquisitions, and reorganization under chapters 7 and 11 with logic and purpose. This book will also provide background information in credit and financial analysis in order for the entry-level reader to better understand the disciplines described therein. In addition, there are many practical examples and formatted tables provided to simplify each concept.

Many primers have been written for investor bankers by knowledgeable professors offering instructions on each discipline listed above, but there is no book like this that encapsulates and integrates these aspects of investment banking from venture capitalists and investment bankers themselves.

However, it should be noted that certain tax data may be outdated due to continuous modifications. You are advised to consult with appropriate professionals in the field.

Acknowledgments

To my wonderful wife, Ann and our two initial public offerings, Paul and Andrew and the resulting nine spin-offs or derivatives Christina, Andrew, Dan, Paul, Nick, Alessandra, Ava, Dan Jr and Annie.

Without their support and input, this endeavor would not have been initiated and completed.

Introduction

The following is a list of my initial transactions as a private investor and a brief account of the various disciplines discussed in detail throughout this text:

Formed a C corporation and issued stock to the founders and angel investors at minimal value.

Concluded a private placement, under Rule 504 of Regulation D, prior to the initial public offering.

Initiated a public offering under Regulation A at three times the value of the private placement.

Initiated a transaction in which 50 percent of the equity was sold to a public company, Canaveral International, American Stock Exchange (ASE) listed.

Assisted in the establishment of a joint venture with Canaveral International and St. Joe Paper, the latter of which is an entity controlled by the DuPont family. This joint venture was dissolved and 50 percent of the equity was sold to John D. McArthur. At that time, Mr. McArthur, a philanthropist, was considered to be one of the wealthiest men in the United States of America. As a result of a strike in one of the facilities, McArthur filed chapter 10 bankruptcy proceedings on behalf of the company

Represented Mr. McArthur and negotiated a successful plan of reorganization.

Arranged a postpetition debtor-in-possession financing with a private equity group.

Arranged a secondary public offering under S-1 SEC regulations.

Concluded a private placement under Rule 506 of Regulation D.

Sold the company to a major Swiss pharmaceutical company.

These corporate finance transactions provided me a foundation to complete over seventy similar operations over the course of my career. Each transaction above will be elaborated on and explained step-by-step in this book

CHAPTER 1

Due Diligence

Checklist for Proposed Acquisitions

Checklists such as these are extremely useful in bringing together in one place all the pertinent facts about a proposed acquisition. However, they should be used only as a guide. Since each company and its people are different, a certain amount of feel and judgment, developed through personal contact, is also required.

Financial Aspect

Latest audited financial statements.

Last available financial statements.

Ten-year summary financial statements (Product P&L essential if more than one product).

Projected operating and financial statements.

Full description of securities, indebtedness, investments, and other assets and liabilities other than normal, day-to-day accounts.

Trial balance and chart of accounts and/or description of accounting practices relative to inventories, fixed assets, reserve accounts, etc.

List of bank accounts and average balances.

Credit reports from banks and Dun & Bradstreet.

Federal income tax status (i.e., excess-profits tax credit, any loss, or unused).

Summary of state and local tax situation (i.e., applicable taxes, unemployment tax rate, any deficiency claims, etc.).

Tax status of proposed transaction and recommendation of best method of acquisition.

Complete list of insurance policies, including description of coverage and cost, and workmen’s compensation rate.

Statement of responsible officer of business as to unrecorded or contingent liabilities.

Statement of inventories.

Comparison of last two physical inventories of sizable money items to reflect slow-moving and obsolete materials. Note finished products particularly. Determine how physical compared with book at last physical inventory.

Aged list of accounts receivable, credit and collection policies, and trial balance of accounts payable.

Detailed statement of general and administrative expenses, selling expenses, factory overhead on a comparative basis for three years.

Status of renegotiation and price redetermination.

Bonus and pension plans, salary and commission contracts.

Statement of unfilled orders—present and past.

Statistics regarding industry group (trends, return on investment, margin on sales, etc.).

If any defense contracts in backlog, check margin of profit. Also if any existing equipment is government owned.

Statements regarding company’s breakeven point, including details of product mix, costs, and fixed and variable expenses.

Status of production or other contracts requiring company performance for a fixed amount where work is yet to be accomplished.

List of outstanding capital-asset items.

Status of patents, copyrights, royalty agreements, etc.

Details of corporate equity accounts.

Operations: Production

Review estimating department procedure and formula used for computing cost to establish sales prices. Also review record of performance versus existing sales prices to determine if all items show a profit. Determine if sales prices are actually based on costs or fixed and influenced by competition without regard to cost.

Appraise key production personnel, also construction and age of buildings, noting those equipped with overhead cranes.

Determine if any improvements were planned and authorized or if any were recently presented and disapproved.

Review planning and scheduling procedure.

Make casual inspection of dies, jigs, and fixtures and note their condition.

Determine age of machinery and if of reputable make.

Determine if production employees are paid daywork exclusively or both daywork and piecework or if some other means of incentive is employed. If other than daywork pay is employed, obtain procedure and any formulas used in establishing the incentive.

Determine method of inspection employed.

Determine if all power is purchased, manufactured, or combination of both.

Obtain general history of plant growth and rearrangements as far back as possible.

Check intrinsic value of patents and (if any) royalty paid on any products or parts produced.

Review past overhead charges and obtain explanation of the larger charges.

Obtain copies of the following:

Plant plan and flowcharts

Product list, catalogs, or circulars

Production schedules and forecasts

Labor contract

Commitments

List of machinery and equipment, office furniture, and fixtures

Organization chart

Daily manpower report

Machine load

Daily production report

Minutes of staff meetings

Standard cost by products

Develop demands by both union and the company in last contract negotiations that were not accepted and incorporated in current contract.

Availability of manpower in area.

Industrial Relations

Number of employees present, a year ago, two years ago.

Plant

Office

Labor turnover—present, a year ago, two years ago.

Absentee rate.

Is the company organized? If so, what union? How long has it been organized?

Plant

Office

What is the company’s labor dispute history?

Is the relationship between the company and employees friendly? Between the company and union representatives?

Scope of the industrial relations department activities:

To whom does the industrial relations director report?

Does he deal directly with the unions, with full power to act within certain limits?

What other executives sit in on negotiation meetings?

Hiring procedure and policy:

From what sources is labor secured?

Is preemployment physical examination provided?

Is preemployment aptitude test provided?

Separations: is separation interview provided?

Approximately what percentage of promotions is from within the ranks?

What type of training or apprenticeship program is provided for maintaining adequate supply of skilled workers?

Is a hospital or first aid department maintained?

Is there an active safety program? If so:

Frequency rate, present, a year ago, two years ago.

Severity rate, present, a year ago, two years ago.

Pay rates:

Average hourly earnings—pieceworkers.

Average hourly earnings—total plant.

How does average compare to area? To similar industry?

Type of incentive system.

Is the productivity per employee satisfactory?

List all fringe benefits:

Obtain estimated cost of fringe benefits.

How do fringe benefits compare to the area? To similar industry?

Obtain copies of all union contracts and pay rate schedules. Obtain information as to any agreements, past practices, or customs between the management and the union.

Separate information on the above should be obtained for each subsidiary plant or division.

Engineering and Research

Description and condition of facilities:

Drafting room and office

Experimental room

Laboratory

Special test equipment

To whom does the head of the engineering department report?

What policies regulate the responsibility and operations of the department?

Give a brief outline of responsibilities, authority, and how they are defined.

Outline briefly the short-range and long-range objectives.

How are related engineering and plant functions coordinated?

Does the department operate on a budget? If so, how is the budget determined?

Number of engineering department employees:

Supervisory

Nonsupervisory

Technical

Nontechnical

What has been the experience of the department in regard to personnel turnover?

What is the source of engineering employees?

Product designs—evaluation, condition of drawings.

Purchasing

Make complete analysis of material supply. This analysis should include the following:

Determine the total value of purchased materials for at least the past five years.

When steel mills ship on self-employed allocation, what is the company’s position in this respect?

List all major items of purchased materials.

List present suppliers and determine location of their plants from which material is supplied.

List names of additional and possibly alternate sources of supplies and plant locations.

Survey the present and future availability of all major items of raw materials consumed in operations.

Study delivered material costs and how they compare with material costs paid by competitors to determine if company under consideration is located advantageously.

Study suppliers’ position relative to their competition to make certain that they are progressive and are using up-to-date methods. This is important where sources of material are few and purchased material costs have a strong influence on the cost of the product being produced.

Investigate past relationships with suppliers.

Determine existence of contracts and/or agreements for materials or outside services, which are obligations that would have to be assumed.

Determine existence of a supplier’s equipment or facilities on company property for which responsibility would have to be assumed.

Review details of inventory, including the following:

Method, accuracy, and date of prices used.

Compare with current prices.

Evaluate inventory on basis of what material would bring on open market.

Determine if material is used currently. Make certain that it is not obsolete and/or actually not usable.

Review the present employees in the purchasing department as to

number of employees,

experience,

education,

ability, and

personal habits.

Review the functions of the purchasing department, including

policies,

procedures, and

records.

Secretary

Does seller have power to do the acts the deal requires?

Legal power: SEC, state corporate laws, blue-sky laws, etc.

Corporate power: charter, bylaws, etc.

Contractual power: restrictions in bank loan agreements and others

Does risk exist that seller’s shareholders will attack deal as a merger?

Does risk of attack by creditors exist? Review need for compliance with Bulk Sales Act in an asset deal.

Is seller’s corporation in good standing and qualified in a state in which its business requires the same?

Is a voting trust needed?

If seller was organized within five years, determine names of promoters and nature and amount of anything of value (including money, property, options, etc.) received or to be received by each promoter directly or indirectly.

Is there a material relationship between the purchaser (or any of its officers and directors) and seller (or any of its officers or directors)?

Will seller indemnify against business brokers’ and finders’ fees?

Would the acquisition invite antitrust investigation or prosecution?

Are seller’s beneficial contracts assignable?

Licenses and royalty agreements

Employment agreements

Leases

Supplier’s contracts

Customer’s contracts, particularly US government

Collective-bargaining agreements

Are any of its beneficial contracts already subject to prior assignments (e.g., to lending institutions)?

Are there customs or contracts that would place an obligation or duty on the company of a buyer in either a stock or an asset deal?

Profit-sharing plans

Contributory employee stock-purchase or savings plant

Restricted stock-option plans

Pension and bonus plans

Pattern of traditionally high salaries and fringe benefits

Group insurance and similar employee benefit plans

Check also 10a­–f.

Obtain brief description of location and general character of principal plants and offices. If any such property is not owned or is held subject to a major encumbrance, state and briefly describe how it’s held (consider lease termination dates and powers to renew). Check the following:

Liens for taxes or assessments

Liens a/c partial payments, and similar, on government contracts

Restrictions, such as zoning, on use of real property and easements

Is there any present or threatened litigation or administrative proceeding that could adversely affect the business?

Are all required federal and state tax returns filed, examined, and settled?

Income and excess-profits taxes

Franchise and capital-stock taxes

Sales and use taxes

Real and personal-property taxes

Other excise taxes

Determine adequacy of all established reserves.

Examine renegotiation procedures, settlements, and reserves.

Determine whether contracts with customers have redetermination clauses and maximum exposure thereunder.

Determine whether contracts with suppliers and customers have escalation clauses and maximum net exposure thereunder.

How secure are seller’s property rights in its

patents,

trademarks, trade names, and copyrights, and

goodwill?

Is seller party to any unusual confidential treatment or secrecy agreements?

Does seller maintain adequate insurance on all insurable property and all reasonable risks? If not, has any significant event occurred with respect to an uninsured property or risk?

Review warranties to customers, particularly warranties of design. Determine whether reserves have been established and review history.

Does selling company presently have requisite amount of general and specialized legal counsel? Can or should they be continued or changed?

Will goodwill or other intangibles result from the transaction? Will the transaction produce in fact the anticipated accounting result? Are any appraisals required?

Does seller have benefits under any contracts or other arrangements that would terminate or increase in cost following acquisition?

Will transaction result in any minority stockholders or provide dissenting stockholders with any appraisal rights?

Marketing

Description of product line and brief company history.

Does the product line of subject company have anything in common with the lines produced by competitor?

Ten-year record of the company’s product sales performance and methods of distribution.

What reputation does the company enjoy among its customers?

Check consistency of production covering last three to five years for seasonal trends or diminishing demand for any products.

Long-range forecast of growth or contraction trends for this industry. What are the prospects of substitute materials, processes, or products?

Who are the customers? What is the long-range outlook for the future business of these customers?

Three- to five-year forecast of demand for the product and estimate of industry’s ability to supply.

An evaluation of the company’s three- to five-year forecast of sales expectations (share of market).

Present competitors:

Description of competitive products

Location and size of plants

Share of market

Pricing policies

Methods of distribution

Reputation and financial

Analysis of past price trends and policies and present or future pricing policies for the product line, considering details.

Competitive pricing

Cost pricing

Analysis of present and potential customers:

Major types of customers and percentage of sales to each

Geographical location

Buying habits

Analysis—location of plant:

Competitive accessibility to major markets

Distribution costs

Review and evaluate sales department:

Sales management

Organization and operating procedures

Field sales force—compensation, turnover rate, sales training

Sales policies

Review and evaluate advertising and promotion programs and policies:

Objectives and techniques of the advertising program

Analysis of principal elements of advertising budget

Appraisal of advertising organization, personnel, and agency relationships

Comparison of techniques and program with those of major competitors

Organization

Does the company have an organization chart?

Is it maintained currently?

Does it properly reflect the assigned functions?

Does the company have an organization manual that maintains organization charts and job descriptions?

Is it maintained up-to-date?

Do the job specifications properly reflect the jurisdiction, authority, and responsibility of the job?

Does the company have a policy manual containing the president’s policy statements and the written interpretations of policy issued by the officers, executives, and general managers?

Is there a program that is actively pursued to train and develop outstanding employees for management and executive positions?

Is there a program of individual executive ratings on an annual basis? If so, review the ratings pertaining to key personnel.

Does the company maintain an education program for its employees?

What are the annual costs?

What percentage of the employees participates in the program?

Does the company maintain a scholarship program?

What are the annual costs?

Review the salary rates of key personnel.

Public Relations

Does the company have a public relations department? Is it properly staffed? To whom does the public relations director or the person responsible for the function report?

Does the company have a planned public relations program? Does the program encompass the major publics, including

press,

stockholders,

financial community,

plant communities,

employees, and

customers?

How is the company considered by the abovementioned publics?

Does the company have an institutional advertising campaign?

Does the company employ outside public relations consultants?

Will the acquisition of the company be a public relations asset?

CHAPTER 2

Business Formations

C Corporation

AC corporation (or simply a corporation) is considered by law to be a unique entity separate from those that own it. As an individual entity, a corporation can be taxed, can be sued, and can enter into contractual agreements. Corporations are owned by shareholders of the corporation, who elect a board of directors to oversee major business decisions and policies. When ownership changes in a corporation, the corporation does not dissolve.

What are the main advantages of forming a C corporation?

Owners of corporations have limited personal liability for business debts.

Corporations can deduct the cost of benefits as a business expense.

With a corporation, there is no limit on the number of stockholders.

Corporations can raise additional funds through the sale of stock.

You do not need to be a US citizen to own or invest in a C corporation.

You can elect S corporation status if certain requirements are met, enabling the company to be taxed similarly to a partnership.

S Corporation

A subchapter S corporation, also called an S corporation, is a corporation that, once incorporated, elects a special tax status. The subchapter S tax election enables the shareholder to pass through earnings and profits directly to their personal tax return. If the corporation has a profit, the shareholder, if working for the company, must pay themselves wages that meet the standards of reasonable compensation.

What are the main advantages of forming an S corporation?

An S corporation is limited to thirty stockholders.

Owners of an S corporation have limited personal liability for business debts

With an S corporation, owners can use corporate losses to offset income from other states.

Owners of an S corporation can save on employment taxes by taking distributions instead of salary.

With an S corporation, there is no double taxation threat because the corporation is not a separate taxable entity.

Limited Liability Company (LLC)

The LLC is a type of hybrid business structure that is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. A popular choice for sole proprietors who are looking to incorporate simply to protect personal assets or secure additional loans, the LLC is thought to be one of the easiest and least expensive forms of ownership to organize. The limited liability company (LLC) is now a recognized business structure in all fifty states plus the District of Columbia. LLCs are gaining popularity with small business owners because they combine the advantages of a corporation with the tax advantages and management flexibility of a partnership.

What are the main advantages of forming an LLC?

Owners of an LLC have limited liability for business debts.

For tax purposes, the allocation of profit and loss of an LLC need not be proportional to ownership interests.

With an LLC, there is no double taxation threat since the LLC is not a separate taxable entity.

You do not need to be a US citizen to own or invest in an LLC.

Hybrid Entities

Limited liability companies are a hybrid entity that combines the favorable flow through tax treatment of a partnership with the limitation of liability afforded by a corporation or limited partnership. By default, an LLC with multiple members will be taxed as a partnership, while single-member LLCs are taxed as sole proprietorships for federal income tax purposes. Any single-member LLC should always opt to be taxed as a subchapter S corporation.

A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs).

The GPs are, in all major respects, in the same legal position as partners in a conventional firm—i.e., they have management control, share the profits of the firm in predefined proportions, and have joint and several liabilities for the debts of the partnership. As in a general partnership, the GPs have apparent authority as agents of the firm to bind all the other partners in contracts with third parties.

Like shareholders in a corporation, the LPs have limited liability—i.e., they are only liable on debts incurred by the firm to the extent of their registered investment and they have no management authority. The GPs pay the LPs the equivalent of a dividend on their investment, the nature and extent of which is usually defined in the partnership agreement.

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Limited Liability

When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppels, or acts of ratification by the firm create ostensible authority.

The limited liability enjoyed by LPs is contingent upon their refraining from taking any active role in the management of the firm. If LPs do assume a management role, they become GPs and thus lose their limited liability protection and acquire the status of an agent.

History

The earliest limited partnerships were called societates publicanorum and arose in Rome in the third century BC. During the heyday of the Roman Empire, they were roughly equivalent to today’s major corporations: many had hundreds of investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.

General Partnership

In the commercial and legal parlance of most countries, a general partnership, or simply partnership, refers to an association of persons or an unincorporated company with the following major main features:

Formed by two or more persons.

The owners are all liable for legal actions and debts the company may face personally.

Created by agreement, proof of existence, and estoppels.

Characteristics

For the most part, the partners own the business assets together and are personally liable for business debts.

Profits are shared equally among the partners. A partnership agreement, however, will usually provide for the manner in which profits and losses are to be shared.

Each partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor’s claims, the partners’ personal assets are subject to attachment and liquidation to pay the business debts.

Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.

Each partner may be held jointly and severally liable for a copartner technically; a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most partnership agreements provide for these types of events, with the share of the departed partner purchased by the remaining partners in the partnership.

Each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners.

Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners.

However, a partner may assign his share of the profits and losses and right to receive distributions (transferable interest). Further, a partner’s judgment creditor may obtain an order charging the partner’s transferable interest to satisfy a judgment.

CHAPTER 3

Classification of Securities

Stocks can be classified into many different categories. The two most fundamental categories of stock are common stock and preferred stock, which differ in the rights that they confer upon their owners.

Common Stock

Most shares of stock are called common shares. If you own a share of common stock, then you are a partial owner of the company. You are also entitled to certain voting rights regarding company matters. Typically, common stock shareholders receive one vote per share to elect the company’s board of directors (although the number of votes is not always directly proportional to the number of shares owned). The board of directors is the group of individuals that represents the owners of the corporation and oversees major decisions for the company. Common stock shareholders also receive voting rights regarding other company matters, such as stock splits and company objectives.

In addition to voting rights, common shareholders sometimes enjoy what are called preemptive rights. Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of stock. This means that common shareholders with preemptive rights have the right but not the obligation to purchase as many new shares of the stock as it would take to maintain their proportional ownership in the company.

But although common stock entitles its holders to a number of different rights and privileges, it does have one major drawback: common stock shareholders are the last in line to receive the company’s assets. This means that common stock shareholders receive dividend payments only after all preferred shareholders have received their dividend payments. It also means that if the company goes bankrupt, the common stock shareholders receive whatever assets are left over only after all creditors, bondholders, and preferred shareholders have been paid in full.

Common stock is simply ownership in the corporation, carrying with it all the usual rights of stockholders (unless otherwise specified) but no special privileges or preferences.

Fundamental Rights of Stockholders

To share proportionate ownership in the undivided assets of the corporation and to possess a certificate stating this ownership in shares

To transfer ownership of shares

To receive dividends when earned and declared by the board of directors

To inspect the corporate books

To subscribe, in proportion to holdings, to any new issue of stock

To share proportionate control through voting power

To vote on other questions affecting corporation property as a whole

To protect the corporation against wrongful acts of a majority

To restrain ultra vires acts of the corporation

To share in the proceeds of dissolution

Class-A common stock is frequently, in reality, a preferred stock. It may have any of the preferred stock features mentioned. Class-A common stock may be introduced along with several varieties of preferred stock in the same corporation. Where class-A common stock exists, there must be a class-B common stock. Class-C stock has also been noted. Class-B stock is called the management stock since class-A stock is almost invariably nonvoting.

Tracking Stock

These are shares issued by a company that pay a dividend determined by the performance of a specific portion of the whole company. Tracking stock differs from a spinoff in that it does not represent or require any change in business structure. Holders of tracking stock are considered to hold equity in the parent company and not the specific entity represented by the tracking stock. Tracking stock is often set up by companies that have several diverse divisions both so that investors can take a share in a division of their interest and so that the performance of these divisions can be tracked in terms of shareholder interest. A company will sometimes issue a tracking stock when it has a very successful division that it feels is underappreciated by the market and not fully reflected in the company’s stock price.

Example

Sprint had a cell phone division. They announced that they were going to create a tracking stock so the market could value that particular division as opposed to having it absorbed in the company. Each Sprint shareholder was given one share of PCS for every two shares of Sprint they owned. Thus, they traded as two different stocks on the New